Madrid Austerity Plan Boosted to $80 Billion

[image]Associated Press

A demonstrator bleeds during a coal miners‘ march on Wednesday to the Ministry of Industry building in Madrid to protest huge cuts in subsidies. Miners walked nearly three weeks from their pits to the capital.

MADRIDSpanish Prime Minister Mariano Rajoy announced new austerity measures Wednesday that should help Madrid cut its budget deficit by €65 billion ($80 billion) through to 2015, and warned the euro-zone‘s fourth-largest economy may not grow at all next year.



‘I said I would lower taxes and I am actually raising them. Circumstances change and I have to adapt to them,’ Prime Minister Mariano Rajo said.


Summary of Prime Minister Rajoy’s main austerity measures:

  • Tax increases: Value-added tax rate raised to 21% from 18%—from one of the euro zone’s lower rates to one of its more average. A reduced rate for some food, books and other products raised to 10% from 8%.
  • Pay cuts: Central government workers’ annual salary is cut by around 7% by eliminating an extra Christmas paycheck; a 13th monthly paycheck, delivered in summer, remains. Public employees previously took a 5% pay cut in 2010, and their salaries have been frozen since.
  • Unemployment benefits: Reduces monthly payments for new jobless claimants to 50% of last reported salary, from 60%, after six months. Two-thirds of the jobless are currently receiving benefits.
  • Political parties, trade unions: Annual government subsidies, an unpopular budget item, will be cut by 20% starting next year.
  • Local governments: Measures to transfer public services to provincial governments are expected to yield €3.5 billion of savings. Such services include street-cleaning, management of parks and recreation centers, some social services.
  • Housing: Tax breaks for home buyers, roundly criticized by economists when they were reintroduced by Rajoy’s government earlier this year, will go away in 2013.

In an impassioned address to parliament, Mr. Rajoy called on all Spaniards to back the measures, which include a value-added tax increase to 21% from 18% and cuts to jobless benefits and public-sector wages, saying Spain’s economic situation is “extraordinarily serious.”

The government had previously said it would need to make no additional cuts this year to meets its budgetary targets, and had rejected the VAT hike. Previously announced measures account for most of the €65 billion target, according to a spokeswoman for Mr. Rajoy, but the precise size of the new cuts wasn’t clear as the government’s spending and revenue projections have fluctuated since it released its annual budget in March.

The additional measures were swiftly welcomed by the European Commission, the executive branch of the European Union.

But analysts said the moves would hurt Spain’s recovery from recession and might not save the country from needing a full-fledged financial bailout on top of a plan to support its struggling banks with up to €100 billion in EU loans.

As Mr. Rajoy spoke during a six-hour parliament debate on austerity, hundreds of coal miners and their supporters rallied in Spain’s capital against government plans to end subsidies for their sector. Some protesters threw rocks and firecrackers at police, the latest sign of growing social unrest in a country mired in an unprecedented, five-year-long crisis.




Previous cuts included in the €65 billion total have already led to an income-tax increase as well as steep budget reductions for all ministries. They also come as Spanish officials are separately negotiating detailed conditions for the EU’s bank bailout that may force Madrid to give up most of the control over its banks to European institutions, and impose losses on holders of banks’ subordinated debt.

The new measures also include a cut in jobless benefits for new claimants, a significant step in a country where unemployment represents almost 25% of the workforce, and a salary cut of around 7% for central government employees. The measures also seek €3.5 billion in savings linked to public services provided by local governments.

“We are trying to stick to a path that is not easy, short or comfortable, but we can’t avoid it—this is the only one that leads to recovery,” Mr. Rajoy told lawmakers.

With Madrid anticipating a 1.7% economic contraction this year, euro-zone finance ministers agreed Monday to relax Spain’s budget-deficit targets to 6.3% of gross domestic product in 2012, from a previous target of 5.3%. Still, tax revenue has dropped due to what Mr. Rajoy on Wednesday called “the second-deepest recession in Spain’s history.” Many observers say that even the less-stringent targets would be hard to meet.

Spain reported a budget deficit of 8.9% of GDP last year.

“Raising indirect taxes in Spain now is tantamount to economic destruction,” said Ioan Smith, a director in London-based Knight Capital brokerage.


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